ECB: Visions of the Future

There are many satellite events in the neighbourhood of the IMF meetings - Jorg Asmussen and Benoit Coeure made interesting speeches and both call for banking union as part of the future development of the euro area.

The Princeton event also had a number of other interesting contributions – details here.

23 Responses to “ECB: Visions of the Future”

The strongest effect of the LTROs has been on bank funding. Euro area banks issued EUR 55 billion in senior unsecured bank debt in the first two months of this year, more than the whole amount in the second half of last year. This is exactly what the LTROs were intended to achieve: to prevent a bank funding crisis. Over time we expect this to feed into higher credit for firms and households.

If the LTROs revived the market for senior unsecured bank debt, then what was the contribution of having Ireland service such legacy debt in insolvent banks?

“Since then, prices have fallen by roughly one-fifth. Now, Spain’s banking sector is caught in a downward spiral of falling prices and bad loans. Citigroup estimates that the country’s financial industry has over €1 trillion in loans on its books that are linked to the real estate market. In late 2011, nearly one-tenth of these loans were junk.”

People need to ask themselves very simple questions as they tend to forget……. especially with regard the divisions of power and competence.

Such as why a Central banker has the competence to speak about the Labour market.
A central banker should not have any role in Money except in the execution of a treasuries orders , never mind the Labour market.

Their function is in the credit / collateral sphere and the credit /collateral sphere only.
Their political power should be challenged head on as the apparent money power given to them by weak and corrupt treasuries should be ripped out of their soft delicate hands.

Absurd statements such as this should not go unchallenged.
“Take the example of Spain. The labour market reforms I mentioned are essential to increase employment. The Spanish labour market has for too long been organised in a way that protects insiders. This is what lies behind the very high rate of youth unemployment”

What lies behind the Spanish unemployment figures is a credit hyperinflation malinvestment episode followed by a lack of money creation.

Plan a) was to assume potential investors in bank bonds were utterly stupid, and incapable of imagining the possibility of a bank being forced to default on a senior creditor (eg Peter Sutherland’s “unthinkable” comment) unless they actually experienced it. On this basis Ireland paying out on Anglo and co would ensure the continued success of the senior unsecured bond market.

Plan b) is to realise that plan a) was even more stupid than the bond investors were assumed to be under Plan a).

Sinn contemplates a common Europeana bond eventually. However, he says “Uniform interest rates will lead to another mis-allocation of capital in Europe”

On Ireland “He said Ireland has been successful in cutting its prices and trimming debt, relative to other troubled euro zone countries, because its housing bubble began to deflate before the ECB and the European Union rolled out cheap loans and rescue programs. “Ireland had to help itself,” he said.”

As opined by me before, self-interest from our N Europeans will lead the way: “From Peter Thal Larsen of Reuters Breakingviews, pointing out the Dutch cabinet who have failed to push through an austerity budget have been cheerleaders for everyone else making cuts across Europe”.

Then Germany:

“The Netherlands may be having trouble with its austerity measures – despite being a vocal advocate for similar steps in Greece – but Germany is having no similar bother, says finance ministry spokesman Martin Kotthaus.

I see no difference from before and after the fiscal pact. The mood actually is improving.

“Given the similarities between the Irish and Spanish cases so far, one has to wonder if the success of the Irish bailout programme could be a sneak preview of things to come in Spain.

Let’s hope not.

Ireland has been held up as a success story by the European Commission, the ECB and the IMF (the so-called troika). This is true in a relative sense—conditions in Ireland are better than those in the other two bailout countries, Greece and Portugal. But Ireland dipped back into recession in the second half of 2011, and with domestic demand set to contract further and foreign demand weakening, it is unlikely the country will find sustainable growth in the next few years. Consequently, Ireland will almost certainly require a second bailout programme when its first programme expires.

This highlights a crucial difference between the Irish and Spanish cases: size.

Ireland is small enough for a second round of EU/IMF funding to be affordable if it is needed. Spain is not.

There is only enough money in the EU/IMF arsenal to bail Spain out once. If Spain were to fail to find sustainable growth during the course of a first bailout, it would get no second roll of the dice. Instead, we would face a debt restructuring in one of the EZ’s largest economies, with detrimental effects on global growth.”

It will be interesting to see what impact the rejection of Sarko and the fall of the Dutch Government over austerity have. Something isn’t working.

There is also something pathetic about Lagarde trawling the third world for spons for the IMF’s next bailout of the EZ while members of the Greek and Spanish über elites are snapping up homes in Mayfair.

Overall, I believe the IMF is being caught in the headlights and wrong footed in relation to the unfolding crisis in Ireland and in the EMU. It is not a good omen for the IMF which in recent years has begun to rid itself of the legacy of culpable mismanagement of economic crisis in earlier years particularly in South America, Argentina. Stiglitz has criticised the IMF for adopting an austerity stance instead of a Keynesian mandate. But even within its own ideology, in Ireland’s case, it failed to counter the ECB stance against burden sharing; in recent weeks, it is proposing that debt for equity swaps in banking in Ireland be adopted as a counter measure in the context of growth rates falling to .5 % signal that the current bailout has failed. On the European stage, it is behind the ESM bazooka, which appears once again to be endorsement of austerity with fuel for the banks. None of these measures seem to be working and arguably they are counter productive. One could say at this point, IMF is not part of any solution to the problems faced by the euro, it is part of the problem, a BIG part

“Third, the ECB has played its part by preventing a funding crisis in the banking sector. The two 3-year LTROs launched in December and February have eased bank funding pressures and stopped further deleveraging. This should over time support lending to firms and households across the euro area.”

That statement is very far from the truth.

Further deleveraging has not been stopped. The Iirsh banks for instance operate under an edict of deleveraging. So too apparantly does NAMA. Whya else would it be paying back bonds that are not due until 2020.

Deleveraging is doing far far more damage than ‘austerity’ ever will.
The austerity cutbacks are miniscule in comparison to the deleveraging agenda.

IMF Survey: Tailored Approach to Debt and Growth Challenges in Europe’s Crisis Countries A build-up of debt after joining the euro zone led three very different countries to the doors of the International Monetary Fund as the global economic crisis took its toll on the Greek, Irish, and Portuguese economies.

Bill Maher appeared on “Piers Morgan Tonight” Monday night and got into a discussion about the 2012 Presidential election. Morgan wanted to know, if Maher had to choose, would he rather see Sarah Palin or Michele Bachmann get the nomination?
“I hope that Palin gets in so that they split the MILF vote,” Maher joked before making his choice: Bachmann.
“I guess Bachmann,” Maher said, later adding that he was splitting hairs. “At least she’s somebody who can read. She has a job; she was a lawyer; she’s in Congress. She’s not just someone who sits there and reads prayers on her Blackberry like Sarah Palin.”